This post originally appeared as a response to a submitted question. I received a few requests to re-post it in a format that could be reblogged. Update below.
The repeal of a minimum wage is actually one of my favorite topics to discuss due to its positive implications in so many areas.
First let’s understand the damage the minimum wage brings about: it creates unemployment, makes goods and services more expensive, potentially drives otherwise employable people to illegal activities, shifts demand to off-the books hires and thus illegal immigration, among other things. And all this socio-economic destruction especially affects the people it purports to help: the poor.
If the minimum wage was good, why isn’t it higher? That is the argument for minimum wage, isn’t it? That without a government set wage, corporations would pay us in steel dimes and peanuts, so to speak? So if a minimum wage is good for society, and raising the minimum wage is always better, why not set the minimum wage at $20 an hour? How about $100/hr? Or $1,000/hr? Who wouldn’t want a job at $1,000 an hour?
The problem with that is that very few people would be hirable at that rate. It’s not difficult to see that the higher the minimum wage, the higher the unemployment. Conversely, the lower the minimum wage, the lower the unemployment. This is the case no matter what the exact minimum wage figure is, whether it’s the outrageous hypothetical of $1,000 an hour or California’s rate of $8 an hour, as long as the government’s minimum wage is set above what the nominal, free market wage would be for any specific job in any specific region. If the minimum wage is set above what the market will bear, there will be job loss. (And if it is set below the market rate for a given job, it is manifestly pointless.)
For the sake of argument, let’s accept that Burger King has decided (see: has been forced) to hire a burger flipper at $1,000 an hour. Without that minimum wage, Burger King could have hired, for example, 100 employees at $10/hr for the same amount. Yes, that one employee would be very happy about his new wage, but what of the numerous other people who could have been hired at a lower wage? Many would be on unemployment insurance, naturally. The same groups of people who advocate for minimum wages also advocate for “social safety nets”: money coerced from the productive to pay the unproductive.
But let’s get back to our friend who is employed. Burger King now has to come up with enough money to pay the new $1,000/hr wages. They’d have to sell thousands of burgers and fries and milkshakes per hour in order to afford to pay that employee. That is, unless, they raise prices to compensate for the new minimum wage. And, after all, everyone else (who is employed) is making at least $1,000 an hour - so those individuals can afford a $500 cheeseburger!
However, now those (many) unemployed won’t be able to even buy a burger with their weekly government unemployment checks. Luckily for them, politicians are very generous with our money. And now, the politicians see people are paying taxes on $1,000 an hour jobs. They envision a tsunami of new tax receipts! What the politicians may not realize is that because so many people are actually unemployed, most people are not only not paying taxes but functioning as a burden on the system. Hence, even if the government raised taxes, it would actually receive less tax revenue while paying out more.
And with the expense of maintaining businesses in the U.S., many companies will find it sound to move their operations to another country, further exacerbating both the unemployment and tax deficit.
So even if the unemployed get greater government assistance, they’re still unlikely to keep up with soaring prices of goods and services (that is, from those businesses who can actually afford to pay their workers minimum wage and purchase raw materials which are now also more expensive because not only is supply down because of the minimum wage, but those suppliers still in business have to pay their workers the new minimum wage).
What are these workers to do if the minimum wage is set above what employers determine they are worth? Illegal activity - drug dealing, prostitution, etc. - pays no mind to minimum wage laws. Even an honest person may find himself desperate enough to venture into dark alleys to make a few bucks. That means that otherwise employable individuals are placing themselves in danger - either by the violence of their criminal occupation or by the resultant incarceration - because there simply did not exist a legal venue for their skills or intellect.
Meanwhile, businesses who would go bankrupt - putting the lives and livelihoods of all the employees at risk - would naturally consider making off-the-books hires. By keeping no formal record of these hires, they can avoid paying minimum wage as well as avoid paying taxes on those wages. These off-the-books employees - by virtue of their very black-market employment - would be reticent about voicing protests against any unsavory business practices or work conditions furnished by their employer for fear of falling on the wrong side of the law themselves. Therefore, even those who can find work would be in less safe environments.
Additionally, individuals in neighboring countries would recognize the blossoming market in off-the-books labor, and illegal immigration would naturally increase.
So, minimum wage creates this domino effect of negative unintended consequences, which makes the argument against minimum wage very clear.
But there’s more.
Above all, there is liberty. A government should never curb the liberty of its citizens, and telling people what to pay and what to charge for labor curbs liberty. It should not be a crime for two people to enter into a peaceful agreement.
If I am willing to work for a business for less than a specified “minimum” wage, that’s my prerogative. Perhaps the connections and on-the-job training are more valuable to me than half the typical wage? After all, we often pay for education, why not get paid a little to learn and meet people in the field? Or perhaps a company wouldn’t hire me at $15 an hour because I lacked a certain amount of experience, but they’d be willing to give me a shot at $7/hr. And if I could find a better paying job that I wanted, no one can stop me from taking it.
Also, the companies would pay a wage that would be commensurate with the skill and productivity of the person they are hiring. Sure, they could offer, say, $2/hr. But the people at that rate would likely be slow, need training and supervision, would be mistake-prone, and perhaps would be more tempted to steal. If they could hire someone at $15/hr that was ten-times more productive, didn’t need training, and was trustworthy, then that would be a smart business decision that the business would make on its own. Higher productivity = higher wage, no government intervention required.
The market would set wages just like it sets prices: supply and demand. Competition between businesses for labor is just as fervent as competition between labor for employment.
In sum: unemployment would be tiny; overall wealth and productivity would be high; crime, illegal immigration, and prices would remain low.
All because we got the government to stop meddling.
Update: This post on repealing the minimum wage drew more traffic to my site in its first week than my entire site received in the two months prior. Among the many responses and emails I’ve received, two have been the most common. First, my post - particularly its $1,000/hour hypothetical - was dismissed as non-sequitur. (The irony is not lost on me that those who most often use non-sequiturs don’t understand what they are.) A non-sequitur is a conclusion that does not logically follow a previous argument. My post is reductio ad absurdum, it takes an argument to a logical extreme in order to magnify the falsity of a premise. Second, there were many cries for studies or evidence proving my allegations. While I find this retort a product of our faulty western education that ignores critical thinking and instead practices the spoon-feeding of studies and memorization, the empirical evidence indeed exists, and it is unequivocal.
Update 2: I’ve also received messages stating that in the employer/employee relationship, the employer has the upper hand. As one person phrased it, “businesses don’t have to compete for labor- there are more workers than jobs.” The argument is that the supply of workers exceeds the demand for workers. But this simply isn’t the case because all individuals and businesses are both producers and consumers. Producers consume in order to produce, and consumers produce in order to consume. The demand to consume becomes the impetus for production; the consumers foster the conditions that catalyze employment-creating production. There will never be absolute employment in a free society, but unemployment can be minimized by removing government’s obstacles to employment.
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